Bài giảng Financial Accounting - Chapter 4: Accrual Accounting Concepts

201Lec04.PPTXAccrual Accounting Concepts1Reports made every month, quarter, or year.GAAP allows end of year to be: - December 31 (calendar year-end company) or - Other month end (fiscal year-end company)Accountants divide the economic life of a business into reporting periods (PeriodicityAssumption).4Determines which time period revenues and expenses are recorded.Example: Suppose that Chuck’s Painting Co. paints a large building in 2014. It bills the customer $80,000, but does not receive payment until 2015. What year would you record the revenue? Suppose that in 2014 Chuck pays $50,000 cash for paint and supplies. Half of these were used on the job above. When and how much would you record as expense? Two general methods exist: - Cash Basis - Accrual BasisAccounting Method . . . . . 2Defined:CASH BASIS Method 3 Record revenue when cash is received. Record expense when cash is paid out.Not GAAP -> We won’t use in class.Possible manipulation. (Receipt or payment of cash can be controlled.)Allowed for Income Taxes (sometimes).Defined: ACCRUAL Method 4 Record revenues when earned. (When goods are sold or services performed) Called Revenue Recognition Principle Record expenses when incurred. (When they were used up to produce revenue) Called Matching Principle. GAAP -> We will concentrate on in class.Requires adjustments and additional accounts. Chuck’s Painting Co. 520142015Revenue $80,000Expense -25,000Net Income $55,000Revenue $ 0Expense -50,000Net (loss) $(50,000)Revenue $ 0Expense - 0Net Income $ 0Revenue $ 80,000Expense - 0Net (loss) $ 80,000Are used to handle inter-period timing issuesSplit up a revenue or expense (when needed) and record part of it in one accounting period and the rest of it in a later period.In the previous example 1/2 of the paint and supplies.Getting revenues and expenses in the correct accounting periods is referred to as achieving a proper “Cut-Off” of the accounting period.Adjusting Journal Entries (AJE) . . . . . 6Adjustments needed when: Deferrals: Pay or receive cash but delay putting effect on income statement. Unearned revenues, Prepaid expenses, Supplies, Depreciation Accruals: Revenue or expense is recorded before cash is received or paid. Accrued revenues or Accrued expensesAdjusting Journal Entries (AJE) . . . . . 7 EXAMPLE: Assume Sierra starts business in Sierra Corporation early October 2014. Statements Trial Balance are prepared every month. October 31, 2014 Unadjusted Trial Balance Debit CreditCash 15,200Accounts Receivable 0Advertising Supplies 2,500 Prepaid Insurance 600Equipment 5,000Accumulated Depreciation 0Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200Salaries Payable 0Interest Payable 0Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Supply Expense 0Rent Expense 900Insurance Expense 0Interest Expense 0Depreciation Expense 0 28,700 28,700Information for Sierra October AJEs (monthly statements) Supplies: Per count, only $1,000 are left at Oct 31. Insurance: Paid $600 for a 1 year policy on Oct 1.Equipment (Depreciation): Assume depreciation expense = $40/monthNotes Payable (Interest): Interest is due when note is paid next year. Rate is 12% per year.Unearned Revenue: 1/3 of the $1,200 received was earned during October.Service Revenue: 50% of a $400 project was completed during the last day of October. Nothing was recorded.Salaries Expense: Oct 31 is a Wednesday. Employees are paid Fridays for the M->F week. Salaries total $400/day.9 1,500 Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200Accounts Receivable 0Advertising Supplies 2,500 Prepaid Insurance 600Equipment 5,000Accumulated Depreciation 0Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200Salaries Payable 0Interest Payable 0Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Supply Expense 0Rent Expense 900Insurance Expense 0Interest Expense 0Depreciation Expense 0 28,700 28,700Supplies: Per count, only $1,000 are left at 10/31. 1,000 1,500 1,500 Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200Accounts Receivable 0Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600Equipment 5,000Accumulated Depreciation 0Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200Salaries Payable 0Interest Payable 0Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Supply Expense 0 1,500 1,500Rent Expense 900Insurance Expense 0Interest Expense 0Depreciation Expense 0 28,700 28,700 550Insurance: Paid $600 for a 1 year policy.$600/12 months = $50/month 50 50 50 Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200Accounts Receivable 0Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550Equipment 5,000Accumulated Depreciation 0Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200Salaries Payable 0Interest Payable 0Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Supply Expense 0 1,500 1,500Rent Expense 900Insurance Expense 0 50 50Interest Expense 0Depreciation Expense 0 28,700 28,700 40 40 40 40Equipment (Depreciation): Assume depreciation expense = $40/month Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200Accounts Receivable 0Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550Equipment 5,000Accumulated Depreciation 0 40 40Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200Salaries Payable 0Interest Payable 0Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Supply Expense 0 1,500 1,500Rent Expense 900Insurance Expense 0 50 50Interest Expense 0Depreciation Expense 0 40 40 28,700 28,700 50 50 50 50Notes Payable (Interest): Interest is due on note paid next year. Rate is 12% per year.$5,000 x .12 x 1/12 = $50/month Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200Accounts Receivable 0Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550Equipment 5,000Accumulated Depreciation 0 40 40Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200Salaries Payable 0Interest Payable 0 50 50Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Supply Expense 0 1,500 1,500Rent Expense 900Insurance Expense 0 50 50Interest Expense 0 50 50Depreciation Expense 0 40 40 28,700 28,700 10,400 400 400 800Unearned Revenue: 1/3 of the $1,200 received was earned during October. $1,200 x 1/3 = $400 earned Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200Accounts Receivable 0Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550Equipment 5,000Accumulated Depreciation 0 40 40Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200 400 800Salaries Payable 0Interest Payable 0 50 50Common Stock 10,000Dividends 500Service Revenue 10,000 400 10,400Salaries Expense 4,000Supply Expense 0 1,500 1,500Rent Expense 900Insurance Expense 0 50 50Interest Expense 0 50 50Depreciation Expense 0 40 40 28,700 28,700 10,600200+ 200 200Service Revenue: 50% of a $400 project was completed during the last day of October. Nothing was recorded.$400 x .5 = $200 to be recorded. Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200Accounts Receivable 0 200 200Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550Equipment 5,000Accumulated Depreciation 0 40 40Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200 400 800Salaries Payable 0Interest Payable 0 50 50Common Stock 10,000Dividends 500Service Revenue 10,000 400+200 10,600Salaries Expense 4,000Supply Expense 0 1,500 1,500Rent Expense 900Insurance Expense 0 50 50Interest Expense 0 50 50Depreciation Expense 0 40 40 28,700 28,700 5,200 1,200 1,200 1,200Salaries Expense: 10/31 is a Wednesday. Employees are paid Fridays for the M->F week. Salaries total $400/day.$400 x 3 = $1,200 to be recorded. Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200 15,200Accounts Receivable 0 200 200Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550Equipment 5,000 5,000Accumulated Depreciation 0 40 40Notes Payable 5,000 5,000Accounts Payable 2,500 2,500Unearned Service Rev 1,200 400 800Salaries Payable 0 1,200 1,200Interest Payable 0 50 50Common Stock 10,000 10,000Dividends 500 500Service Revenue 10,000 400+200 10,600Salaries Expense 4,000 1,200 5,200Supply Expense 0 1,500 1,500Rent Expense 900 900Insurance Expense 0 50 50Interest Expense 0 50 50Depreciation Expense 0 40 40 28,700 28,700 30,190 30,190Use to prepare Financial Statements Sierra CorporationTrial BalanceOctober 31, 2014 Unadjusted Trial Balance Adjustments Adjusted Balance Debit Credit Debit Credit Debit CreditCash 15,200Accounts Receivable 0Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600Equipment 5,000Accumulated Depreciation 0Notes Payable 5,000Accounts Payable 2,500Unearned Service Rev 1,200Salaries Payable 0Interest Payable 0Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Supply Expense 0 1,500 1,500Rent Expense 900Insurance Expense 0Interest Expense 0Depreciation Expense 0 28,700 28,700 450 150 150 150Modification: Prepare insurance entry as of 12/31/14 assuming Sierra prepares statements only annually? On 10/1 paid $600 for a 1 year policy.$600/12 months = $50/month x 3 months (Oct, Nov, Dec)CLOSING ENTRIESAll accounts are classified as either permanent or temporary.19Permanent Accounts Also called Real accounts Consist of all balance sheet accounts Beginning balances are needed to arrive at ending balances DO NOT get closed20Temporary AccountsAlso called nominal accountsConsist of all income statement accounts and a few moreHave a temporary life = 1 accounting periodAre closed (zeroed out) at the end of each accounting period21The CLOSING PROCESSPURPOSE: Set the stage for the next accounting cycle. (Revenue & Expense accounts will contain info for the next period only). Summarize income and expenses for the period just past and record this result in the RETAINED EARNINGS account.TIMING: Performed after the period end, after statements are prepared. 22CLOSING PROCEDURESTEP 1Debit all revenue accounts. Credit a new account called INCOME SUMMARY.LEDGERINCOME SUMMARY239000 SERVICE REVENUECLOSING PROCEDURESTEP 1Debit all revenue accounts. Credit a new account called INCOME SUMMARY.LEDGERINCOME SUMMARY9000 SERVICE REVENUE90009000JOURNALSERVICE REVENUE 9000 INCOME SUMMARY 9000 24CLOSING PROCEDURESTEP 1Debit all revenue accounts. Credit a new account called INCOME SUMMARY.STEP 2Credit all expense accounts. DEBIT goes to INCOME SUMMARY.LEDGERINCOME SUMMARY9000SERVICE REVENUE90009000OPERATING EXPENSE5000JOURNALSERVICE REVENUE 9000 INCOME SUMMARY 9000 25CLOSING PROCEDURESTEP 1Debit all revenue accounts. Credit a new account called INCOME SUMMARY.STEP 2Credit all expense accounts. DEBIT goes to INCOME SUMMARY.LEDGERINCOME SUMMARY50009000SERVICE REVENUE90009000OPERATING EXPENSE50005000JOURNALSERVICE REVENUE 9000 INCOME SUMMARY 9000 INCOME SUMMARY 5000 OPERATING EXPENSE 5000 26STEP 3Determine the balance in the INCOME SUMMARY account. Then close it out. Use RETAINED EARNINGS for the other debit or credit.LEDGERINCOME SUMMARY50009000RETAINED EARNINGSBeginning balance400027LEDGERINCOME SUMMARY50009000RETAINED EARNINGSBeginning balanceJOURNALINCOME SUMMARY 4000 RETAINED EARNINGS 4000 40004000400028STEP 3Determine the balance in the INCOME SUMMARY account. Then close it out. Use RETAINED EARNINGS for the other debit or credit.STEP 4Close the DIVIDENDS PAID (or Drawing) out directly to the RETAINED EARNINGS account. Not to Income Summary!LEDGERDIVIDENDS PAID1000RETAINED EARNINGSBeginning balance4000 Income Summary29STEP 4Close the DIVIDENDS PAID out directly to the RETAINED EARNINGS account. Not to Income Summary!LEDGERDIVIDENDS PAID10001000RETAINED EARNINGSBeginning balanceJOURNALRETAINED EARNINGS 1000 DIVIDENDS PAID 1000 4000 Income Summary1000Ending balance30Summary of the Accounting Cycle1. Analyze business transactions2. Journalize the transactions 6. Prepare an adjusted trial balance7. Prepare financial statements8. Journalize and post closing entries9. Prepare a post-closing trial balance4. Prepare a trial balance3. Post to ledger accounts5. Journalize and post adjusting entries31Example: On the next slide is the adjusted trial balance for Konk Co.Required: Prepare closing journal entries. 32Cash $11,000Accounts Receivable 21,500 Art Supplies 6,000Prepaid Insurance 2,500Printing Equipment 60,000Accumulated Depreciation $35,000Accounts Payable 5,000Interest Payable 150Notes Payable 5,000Unearned Advertising Revenue 5,600Salaries Payable 1,300Common Stock 20,000Retained Earnings 5,500Dividends 12,000Advertising Revenue 61,500Salaries Expense 11,300Insurance Expense 850Depreciation Expense 7,000Art Supplies Expense 2,400Rent Expense 4,350 $139,050 $139,050 DON’TCLOSE33General Journal12/31 Advertising Revenue 61500 Income Summary 61500 To close revenue accounts 12/31 Income Summary 26050 Salaries Expense 11300 Insurance Expense 850 Interest Expense 150 Depreciation Expense 7000 Art Supplies Expense 2400 Rent Expense 4350 To close expense accounts (11300+850+150+7000+2400+4350=26050)34General Journal12/31 Income summary 35450 Retained Earnings 35450 To close income summary and update retained earnings (61500cr net with 26050dr = 35450cr). Close with 35450dr. 12/31 Retained Earnings 12000 Dividends 12000 To close dividends paid against retained earnings 35 Konk Co. AgencyPost Closing Trial BalanceDecember 31Debit Credit Cash $11,000Accounts Receivable 21,500 Art Supplies 6,000Prepaid Insurance 2,500Printing Equipment 60,000Accumulated Depreciation $35,000Accounts Payable 5,000Interest Payable 150Notes Payable 5,000Unearned Advertising Revenue 5,600Salaries Payable 1,300Common Stock 20,000Retained Earnings (Begin 5,500 + 35,450 - 12,000) 28,950 $101,000 $101,000 36